Interest/Transcript
Transcript Title text reads: The Mysteries of Life with Tim and Moby. Moby sits behind a wooden stand. A sign above him reads, First National Bank of Moby. Tim approaches. TIM: You can't just open a bank by yourself, you know. You have to have a charter, and a business plan, FDIC insurance… Moby beeps and hands over a stack of documents. Tim reads through them. TIM: Wow, free checking and no ATM fees? Where do I sign up? A letter appears. Text reads as Tim narrates: Dear Tim and Moby, we are learning about interest in math class but I still don't get it. Can you tell me what it is? Sincerely, LaDiamond. TIM: Well, interest is extra money that a bank gives you for keeping your money there. A label appears, reading, interest. A 100-dollar bill appears. A 10-dollar bill and two 1-dollar bills are added to it. TIM: It also works the other way. When you borrow money from a bank, you can’t just do it for free. The bank charges you a fee, and that’s called interest, too. Moby hands Tim 100 dollars. Tim hands back 100 dollars, plus 12 extra dollars. TIM: Interest is calculated as a percent, which means the more money you have in the bank, the more extra money you get! A label appears, reading: percent. A pile of cash grows, as more cash is added to it. TIM: And the more money you borrow, the more extra money you have to pay back! Moby hands Tim more money. Tim hands back even more. TIM: There are two types of interest; simple interest and compound interest. Two labels appear, reading, simple interest, and compound interest. Moby beeps. TIM: Your bank offers simple interest, eh? Okay, I've got 100 dollars here. Let's deposit it and see what happens. I'd like to open an account please… On-screen, Tim hands Moby a 100-dollar bill. Moby beeps and hands Tim a brochure, a passbook, and a toaster. TIM: Wow, free toaster with my new bank account! You didn’t steal this from the kitchen, did you? Moby beeps and shakes his head. TIM: Okay, good. According to this paperwork, my account has an annual interest rate of 12 percent. That means the interest gets calculated once a year. On-screen, text in the brochure reads, annual interest rate, 12 percent. The word, annual, is underlined. TIM: Interest can also be calculated monthly, quarterly, and even daily! Moby beeps. TIM: Yeah, I know, you offer yearly interest. Anyway, my 100 dollars is called the principal. A label appears, reading, principal. TIM: Now, to find out how much interest we get, we multiply the interest rate by the principal. A label appears, reading, interest. TIM: Let’s see, 12 percent equals 0.12, times 100 dollars. That's 12 dollars. An equation appears, reading, 0.12 times 100 dollars equals 12 dollars. TIM: So every year, Moby's bank adds 12 dollars to my account. Add that to the 100 dollar principal, and I'd finish my first year at the First National Bank of Moby with 112 dollars in my account. An equation appears, reading, 12 dollars plus 100 dollars equals 112 dollars. TIM: Woo-hoo! Time to head out to the Ming Garden Buffet! On-screen, a Chinese food buffet appears. A sign reads, All You Can Eat, 12 dollars. Moby beeps. TIM: Well, compound interest is a little different. A label appears, reading, compound interest. TIM: It's paid on both the principal and the interest you've already accumulated! There's really no easy formula for this. To calculate compound interest, it’s really best to make a chart, like this one. A chart appears with 12 columns and 3 rows. The columns are labeled, month 1 through month 12. The rows are labeled, principal, interest, and new amount. Moby beeps. TIM: Yeah, I know it's complicated, but stick with me, and I promise you'll get it. We've already determined that your annual percentage rate, the amount of interest you offer per year, is 12 percent. Now, if you decided to offer monthly compound interest, you wouldn't pay me 12 percent interest every month. You'd be giving cash away hand over fist, and your bank wouldn't stay in business. Instead, you'd break things down into 12 monthly installments of 1 percent each. One percent interest every month doesn’t sound great, but just you wait. At the end of the year, I'll have more money than I would if you gave me 12 percent annual interest. Now, let's start filling out that chart. On-screen, the amount, 100 dollars, appears in the chart as the principal for month 1. TIM: We know that 1 percent of 100 dollars is 1 dollar. An equation appears, reading, 0.01 times 100 dollars equals 1 dollar. The amount, 1 dollar, appears in the chart as the interest for month 1. TIM: So after the first month, I'd have 101 dollars. On-screen, the amount, 101 dollars, appears in the chart as the new amount for month 1. TIM: The difference with compound interest is that for the next month, you have to calculate 1 percent of 101 dollars; not just 1 percent of 100 dollars even. On-screen, the amount, 101 dollars, appears in the chart as the principal for month 2. TIM: Let's see, 0.01 times 101 dollars is… 1 dollar and 1 cent. An equation appears, reading, 0.01 times 101 dollars equals 1 dollar and 1 cent. The amount, 1 dollar and 1 cent, appears in the chart as the interest for month 2. TIM: Now, add that to the principal, and you get 102 dollars and 1 cent. On-screen, the amount, 102 dollars and 1 cent, appears in the chart as the new amount for month 2. TIM: For the next month, you'd take 1 percent of that 102 dollars and 1 cent, to get another dollar and 2 cents in interest. On-screen, the amount, 102 dollars and 1 cent, appears in the chart as the principal for month 3. An equation reads, 0.01 times 102 dollars and 1 cent equals 1 dollar and 2 cents. The amount, 1 dollar and 2 cents, appears in the chart as the interest for month 3. TIM: Add it on to the 102 dollars and 1 cent, and by the next month, my principal is 103 dollars and 3 cents. On-screen, the amount, 103 dollars and 3 cents, appears in the chart as the new amount for month 3. TIM: If you keep filling out the chart, you can see that the amount of interest I've accrued over a year, plus my principal, comes out to 112 dollars and 67 cents, instead of just 112 dollars! On-screen, the rest of the chart is filled in. The amount, 112 dollars and 67 cents, appears in the last spot, as the new amount for month 12. TIM: If I got that deal… well, not only could I hit the buffet, but I could buy a candy bar afterwards, too! So do you understand the difference between simple and compound interest? Moby beeps. TIM: You don't? Are you really sure that you should be running a bank if you don't know how to calculate interest? Moby beeps. He hands Tim a lava lamp. TIM: Okay, this is definitely from my bedroom. Category:BrainPOP Transcripts Category:BrainPOP Social Studies Transcripts Category:BrainPOP Math Transcripts